Factor Timing via Market Momentum

Does it work?

INTRODUCTION

There is little evidence that market timing works, but how about factor timing? We might be poor at predicting where the S&P 500 will be in three or twelve months, but should this not be easier for deciding on whether to bet on value or growth stocks?

Theoretically, investors should prefer risky stocks when the stock market is in a bull and defensive stocks in a bear market. Investors make style changes slowly, therefore we might be able to exploit such trends by measuring the momentum of the stock market. When the momentum is positive, buy cheap and small-cap stocks, when negative, buy high-quality and low-volatility stocks.